5 Steps of Personal Finance

5 Steps of Personal Finance

When we start earning money, we also start spending more. This is simply because of not having enough knowledge of personal finance.

 

 

Here are 5 steps you should follow to make financial freedom

 
  • Income:
  • Credit card, loans, and other debts.
  • Insurance and Medical claim for Money Protection. (Auto insurance, health
    insurance, life insurance, travel insurance, home insurance etc.)
  • Have an emergency fund (Savings accounts and debt funds)
  • Investment. (Equity, Real estate, Bond)

 

Income:

 

The author of Rich Dad, Poor Dad ( best selling book on personal finance), Robert Kiyosaki, says, ‘’It’s not about how much money we make, It’s about how much the money we keep’.


This sentence tells a major thing that needs to be understood. Whenever your salary is credited to your bank account, you must know the cashflow.


We all know without income, any of the further steps are not possible. That’s why it is essential for understanding your cash flow.


The next 5 videos will be related to income. So keep that in mind that monthly cashflow is the most required thing to achieve financial freedom.

 

Credit Cards, Loan and other Debts:

 

Credit cards and loans are the main reason people cannot save more money and invest.

 

If you are a fan of using credit cards, you may get into the financial trap very soon.

 

In developing countries like India, credit cards’ annual interest rate is between 35-42%!!! That’s a huge number. The credit card companies so much benefit because they want you to use credit cards frequently.

 

But at the end of the year, the credit card can eat lots of money and destroy your financial planning.

 

There are many types of bank loans that include home loan, car loan, education loan, credit card loan, personal loan, two-wheeler loan, plot loan, tax benefit home loan and many more.

 

When we take a loan, there is an interest rate that we have to pay every month. The average per annual interest rate in India is 10-24% and sometimes even more. That’s the reason you should avoid taking loans.

 

And if you already have a loan or you must take a loan, then try to
complete as soon as possible, and the most thing don’t miss any installment.

 

Money Protection:

 

Money protection should the most considerable thing to project your hard-earned income.

 

Our life is totally uncertain. Anything can happen anytime. In the simplest language, insurance is used for protecting financial loss.

 

For instance, life insurance is useful when you are the only one member in the family who earned money. That means your whole family is dependant on you. Sorry for such lines, but if you expire suddenly for whatsoever reason, your family will be compensated.


We all know that medical costs are increasing rapidly and because of so many reasons we can fall ill. Illness, sickness, and diseases can cost us millions. There can be so many diseases that occur at any time. If you have a health insurance policy, you need not worry about the cost of treatment, hospitalization, and medication. That is the reason one must have a health insurance policy.

 

Motor insurance or car insurance is very much useful in an incident like an accident. Some policies cover protection from floods or earthquakes. That’s how motor insurance projects your money.

 

If you have home insurance, it will protect you from financial losses due to fire and natural calamities. Having a home is everyone’s dream. That’s the reason most of us prefer to take a home loan. And there is nothing wrong with taking home loans. But, one should never underestimate the importance of Home Insurance.

 

Emergency Fund:

 

We learned how insurance protects us from financial losses. Initially, we have to pay for all the required amount and cover financial losses from insurance.

 

That’s why everyone must have an emergency fund in life because we will not get service without having a decent amount of cash.

 

Let’s understand what kind of situation can be faced if we have an emergency fund.

 

  • Major health expense.
  • Job loss. (Current example: Jet Airways)
  • Home repairing
  • Car repairing

 

Now let’s understand how to plan for such an emergency.

 

A savings account is one of the best and most common ways to handle a critical situation. We can withdraw a decent amount from our savings bank account.

 

Investing in short-term debt funds is also a good approach for an emergency fund. In these types of funds, we get liquidity and get higher returns compared to banks. We are going to cover the major portion of this course that is totally based on investing.

 

Investment:

 

All the things we learned so far was about protecting our money and how to maintain our cash flow in a critical situation.

 

Investment is an essential thing in order to fulfill our financial planning such as child education planning, child marriage planning, buying a car or a home, retirement planning, traveling planning, and many more.

 

Now let’s talk about becoming rich.

 

How to become rich? The answer is simple: Invest your money.

 

In layman’s terms investing can be defined as money works to make money. Whenever we buy an appreciating asset, it becomes an investment for us.

 

For instance, buying a real estate property is an investment. Why? Because in the next 5,10,15 years, the value of that property will increase. And when we sell this property, we definitely get a higher amount compared to the buying amount.

 

From the next video lectures, we will understand different types of investment options.